The amount of 1988 scheme pension that can be commuted is subject to the limits set out in the Regulations. In most cases a quarter of the pension can be commuted. With some exceptions, an ordinary pension in respect of at least 25 but less than 30 years of service can be commuted to give a maximum lump sum of no more than two and a quarter times the full amount of the gross annual pension. Please refer to the Regulations for full details of the commutation limits applicable to members.

Administrators must ensure that the payment of a lump sum in lieu of pension is compliant with the tax rules as well as with the Regulations. The main taxation restriction is that for a lump sum to be authorised under the tax rules it must not exceed 25% of the total value of benefits crystallised ("25% HMRC limit"). Additionally, where an officer's pension savings exceed HMRC's Lifetime Allowance (LTA) (for retirements prior to 6 April 2023) or an officer's lump sum benefits exceed their Lump Sum Allowance (LSA) (for retirements on or after 6 April 2023), an additional tax charge may fall due.

In cases where lump sum benefits are payable in two instalments (as described in 1988 scheme commutation - break between leaving service and pension commencing section below), we would expect both lump sums to be separately tested against the member's remaining tax-free allowance at the point when each lump sum is paid.

Please refer to HMRC guidance for further information.

There are some scenarios where the 25% HMRC limit could potentially be breached.

• A member with a commutation factor above 20 commutes 25% of their pension. This can be avoided by commuting a lower proportion of pension.
• Where a member has opted for Allocation of some of their pension in exchange for extra survivor benefits.

Please refer to HMRC guidance if such cases arise.

For an officer retiring on pension directly from active pensionable service (and for pension credit members) the lump sum payable can be determined as follows:

1988 scheme pension given up x factor from Table 1

Equivalently, the pension given up can be determined as follows:

Lump sum payable from the 1988 scheme / factor from Table 1

For an officer retiring with a break between leaving service as an active member in the police pension schemes and pension commencing, the commutation lump sum should be calculated as in 1988 scheme commutation - retiring from active service above in the following cases:

• if the pension commences at or above age 55; or
• if the pension commences on grounds of ill health before age 55 and attracts full pension increases.

In other cases, that is where the pension commences before age 55 and the member is not immediately entitled to full pension increases, an alternative calculation is needed. The three main scenarios where this arises are as follows (note others may exist):

• Officer left service before age 50 with at least 25 but less than 30 years of pensionable service. The 1988 scheme pension comes into payment at age 50 but pension increases are not payable until 55.
• Officer left service with a deferred pension entitlement and is later awarded early payment of the pension on ill-health grounds but does not meet the criterion to receive pension increases under the Pensions (Increase) Act. The 1988 scheme pension comes into payment immediately but pension increases are not payable until 55.
• Officer opted out of the 1988 scheme after accruing 30 years' pensionable service but does not take the pension immediately. The 1988 scheme pension comes into payment later, before age 55, and pension increases are not payable until 55.

In these cases, the lump sum will be payable in two instalments. One lump sum will be payable when the pension commences; a second lump sum will be payable when the member reaches age 55 (when the member becomes entitled to pension increases). The amount of the second lump sum is equal to the amount of the lump sum paid at retirement multiplied by the percentage pension increase applying between the member leaving pensionable service and the pension commencing. The second lump sum is not affected by pension increases accrued after the benefits come into payment.

In these cases, the lump sum (as calculated in accordance with the Regulations) should be split between the two payment dates as follows:

a. Lump sum payable when pension commences:

Pension given up x (factor from Table 1 + (PI% x factor from Table 2)) / (1 + (PI% x factor from Table 3))

b. Lump sum payable at age 55:

Lump sum payable when pension commences x PI%

Where:

PI% is the percentage increase in the pension that is attributable to pension increases effective during the period between leaving pensionable service and the pension commencing. (Pension increases accrued after the pension commences are not to be included.)

Alternatively, the pension given up can be determined as follows:

Lump sum payable when pension commences x (1 + (PI% x factor from table 3)) / (Factor from Table 1 + (PI% x factor from Table 2))